Based on the last 2 days of trading, it appears we’ve got a selling stampede just getting started. The start of a selling stampede is marked by 2 consecutive days of NYSE internals greater than or equal to 2:1 on both decliners:advancers and down volume:up volume. Taken together, this past Friday and today met this criteria. After the first couple of days of bad internals and heavy selling the indexes experience a 2 to 3 day throwback rally. Given that tomorrow is Turnaround Tuesday I personally would like to see an up open that gets sold off during the day and a down close.
Since the beginning of the secular bear market in 2000, I can count 29 selling stampedes. The average stampede;
- Shows a loss of 3.4% in $SPX during the first 2 days,
- Hits a trough of -11.8% on $SPX from the closing price on Day 0,
- Reaches the trough $SPX value 18 trading days into the stampede,
- Ages to 22 trading sessions before beginning the 2-day rally that marks the end of the stampede,
- Sees $SPX tack on 3.9% during the 2-day rally that marks the end of the stampede.
Both $SPX and $COMPQ appear to me to be setting up for the next leg down from their respective April 2012 peaks so I don’t expect this to be the last selling stampede of the year. Further, I expect $SPX and $COMPQ to put in lower lows during this stampede and confirm their downtrends. $RUT is already in a confirmed downtrend and is showing the way for reduced risk appetite of market participants. Therefore, I will continue to hold my TZA, TVIX and UVXY.
Be that as it may, towards the end of this selling stampede I am going to look for some long call option plays for short squeezes. Using The PPT, I will screen for Hybrid Score >2.5 and Short as % of Float >20%. I’ve run this screen a couple of times since becoming a PPT member a few weeks ago. I noted that long calls in ZNGA, LEAP and NIHD appeared to offer attractive risk/reward setups. Sure enough, ZNGA and LEAP held their own today (ZNGA was up nicely, actually) with only NIHD misbehaving.
Best to your trading.
